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Tip of the Week: Use allowance to teach kids money skills

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One of the most exciting parts of parenthood is watching your children learn as they grow. Of course, life's lessons can be tough just as often as they can be pleasant. And as you want to protect kids from falling off their bike or scraping a knee, you also want to set them up for a successful financial future, as free from worries as possible.

Jan. 29, 2013
12:01 a.m.

One of the most exciting parts of parenthood is watching your children learn as they grow. Of course, life's lessons can be tough just as often as they can be pleasant. And as you want to protect kids from falling off their bike or scraping a knee, you also want to set them up for a successful financial future, as free from worries as possible.

One of the best things you can do to prepare your kids for a lifetime of handling money is to get them started early. But it isn't only about timing - following through with lessons and providing plenty of explanation is essential. Keep these tips in mind to give your kids a leg up in learning about finances.

- Start saving. The earlier you can get your kids into the habit of saving, the more they'll have to enjoy down the road. The concept doesn't need to be overly complex - and it shouldn't be, when you're dealing with very young children. Piggy banks are a perfect tool for starting saving habits; a simple glass jar works, too, and gives kids an exciting visual to associate with their savings. As your children grow, so should their ideas about saving money. Opening a real savings account in your child's name is not only an exciting event for her, it builds an early understanding of banking. Some schools and banks even have partnerships that allow students to make deposits at school. If your school doesn't offer such a program, make trips to the bank with your kids and show them how to monitor their accounts.

- Have ongoing conversations about money. Making your children comfortable with discussing finances is a gift that, while not flashy, will serve them well throughout their lives. Start conversations about needs versus wants, budgeting and life's necessary expenditures. Encourage price comparison skills by going grocery shopping together and looking at different brands. Set an example by telling kids how you save up to buy an item that you want and ways that you cut costs - and what you can get from the savings. If there's something your child wants, provide guidance and ideas for how to save up the amount needed to make the purchase.

- Effectively use an allowance. An allowance is a tricky thing - it can be a good teaching tool, but you don't want your kids to view it as a handout. Whether or not you choose to associate chores with an allowance is up to you, but you should have discussions with your children about when allowances will be paid, and how they can be spent - or saved. Encourage savings by providing two bank envelopes - one for savings and one for spending. If your budget allows for it, consider a "match" program in which you contribute a percentage every time your child makes a savings deposit.

- Don't be afraid of mistakes. Some of the most powerful lessons lie in making mistakes, so don't be afraid to let your children make some less-than-perfect decisions. Whether they overspend their budgets or waste money on something frivolous and later regret it, it's important for them to learn the consequences of financial mismanagement early in life.